Based on a rough subscriber-based valuation, a "fair" price for AOL's stock lands the stubs around $53.50 per share. That number is arrived at by multiplying members (8 million) by expected life-subscription payments, to get:
8 million x $16 = $128,000,000
x 40 months
-------------------------
= $5.12 billion market cap
Excuse my French, but that's a really bizarre calculation.
First, it seems based on the notion that providing service for 8 million customers for 3+ years has no costs. Unlike the Cable TV business, there is a recurring variable expense - the local access phone lines, the leased data circuits, computers that wear out and need repair, and 5,000 people in customer support. AOL's gross margin is somewhere around 40%, and advertising to recoup the 25% per anum churn in customers will chew up all the rest.
The second major flaw is - if you assume 40 months is the average life of a membership on AOL, at any -one moment- in time, the customer base has a *remaining* lifetime of only 20 months (assuming your numbers). You need to divide your $5.2 billion by 2. |
